The Tax Court held that because taxpayer had not adopted her former foster son after he turned 18, he was no longer legally her child and, therefore, she could not claim his daughter as a qualifying child for purposes of the Child Tax Credit (CTC), the Earned Income Tax Credit (EITC), and head of household filing status. Cowan v. Comm'r, T.C. Memo. 2015-85.

Background

Jean Cowan is the former guardian of Marquis Woods. Marquis was born in 1986 to a mother addicted to drugs and was brought to live with Cowan when he was six weeks old. He has lived with her continuously since then, and in 1991, Cowan was appointed as his legal guardian.

When Marquis turned 18 in 2004, Cowan's guardianship ended by operation of state law. Despite the termination of the guardianship, Marquis continued to live with, and to be supported by Cowan; she regards Marquis as her son, and he regards her as his mother. However, Cowan never officially adopted Marquis. Cowan claims she did not know there was a legal distinction between guardianship and adoption, and did not know adult adoption was a possibility.

Marquis fathered a daughter in 2006, and Marquis and his daughter continued to live with Cowan, who provided most of the support for the household.

For 2011, Cowan reported adjusted gross income of $13,920, claimed dependency exemption deductions for both Marquis and his daughter, and claimed the EITC, CTC, and head of household filing status on the basis of the daughter's putative status as Cowan's grandchild and, thus, qualifying child under Code Sec. 151(c).

The IRS disallowed Cowan's dependency exemption deduction for the daughter, EITC, CTC, and head of household filing status.

Analysis

An individual is allowed an exemption deduction for each dependent, defined as a qualifying relative or a qualifying child (Code Sec. 151(c)). An individual can be a qualifying relative even if not literally a relative of the taxpayer, but lives with the taxpayer and is a member of the taxpayer's household (Code Sec. 152(d)(2)(H)).

In addition, taxpayers are entitled to claim EITC (Code Sec. 32) and CTC (Code Sec. 24) for a qualifying child. Under Code Sec. 152(c), a qualifying child must be the taxpayer's child or a descendant of the taxpayer's child. Further, a "child" is defined as a son, daughter, stepson, or stepdaughter of the taxpayer, or an eligible foster child of the taxpayer (Code Sec. 152(f)(1)(A)).

A taxpayer qualifies for head of household filing status if the taxpayer is unmarried, has paid more than half the cost of keeping up a home for the year, and a qualifying person has lived with the taxpayer for more than half the year (Code Sec. 2(b)).

The IRS conceded that Marquis was a "qualifying relative" and that Cowan was entitled to a dependency exemption deduction for him. But it maintained that the daughter was not a qualifying child for Cowan, and that she was therefore not eligible for a dependency exemption, EITC, CTC, or head of household status.

The Tax Court reasoned that whether the daughter was Cowan's "qualifying child" in 2011 turned on whether Marquis was Cowan's "eligible foster child" under Code Sec. 152(f). Cowan argued that Marquis, her former ward, was still her foster child because they continue their relationship and hold each other out as parent and child, and therefore he was her "eligible foster child." By this thinking, the daughter, as a descendant of her child, was a qualifying child.

However, the Tax Court pointed out that, under Code Sec. 152(f)(1)(C), an eligible foster child is an individual who is "placed" with the taxpayer by a court order. Marquis was "placed" with Cowan from 1991 until he turned 18 in 2004, at which point her guardianship ended by court order. The court found Marquis was no longer Cowan's eligible foster child because she could no longer show that he was placed with her by court order. Consequently, the court concluded that Marquis was not her eligible foster child and was thus not her "child" as defined in Code Sec. 152(f). As a result, his daughter could not be Cowan's "qualifying child" by virtue of being the descendent of her child.

Because, the Tax Court determined that under Code Sec. 152(c), the daughter was not Cowan's qualifying child, the court held Cowan was not entitled to a dependency exemption, EITC, or CTC. The court further held that because neither Marquis nor the daughter were qualifying persons for purposes of Code Sec. 2(b), Cowan could not file as a head of household.

OBSERVATION: Cowan may have been able to salvage the dependency exemption for Marquis' daughter if she had argued that the daughter was a "qualifying relative." That status can exist where the person has the same principal place of abode as the taxpayer and is a member of the taxpayer's household during the entire taxable year. Although the daughter lived with Cowan for only 11 months in 2011, the regulations allow an exception to the full-year requirement for temporary absences due to special circumstances. However, since Cowan did not try to argue that the daughter was a qualifying relative, the court did not address the issue.

For a discussion of the earned income credit, see Parker Tax ¶102,100. For a discussion of the child tax credit, see Parker Tax ¶ 100,700. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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